*4.1.6.5 Impulse response variable BOPO to variable FDR*

**Figure 7** shows the response of BOPO due to shocks from FDR. The findings suggest initially it responds positively until the first three periods. However, the trend is negative in the long run. These conditions are consistent with VECM estimation where both variables have a negative relationship in the short run, but no relationship in the long run. It indicates that operational risk is only affected in the short run, not in the long run.

### *4.1.6.6 Impulse response variable BOPO to variable NPF*

**Figure 8** shows the response of BOPO due to shocks from NPF. The findings suggest that BOPO responds positively in the first four periods due to shocks from NPF, but tend to decline in the long run. In this regard, these findings are consistent with VECM estimation where BOPO is sensitive due to the change of NPF. These conditions also indicate that operational risk is sensitive toward financing risk in Islamic bank.

**Table 9** shows the summary of risk sensitivity based on originated shocks into Islamic banks. The findings suggest that the risks in Islamic banks are interrelated to each other, in either the short or long run. Specifically, **Table 9** suggests as follows:

*4.1.6.3 Impulse response variable NPF to variable FDR*

*Impulse response FDR to BOPO. Source: Author's calculation.*

*Impulse response FDR to NPF. Source: Author's calculation.*

*4.1.6.4 Impulse response variable NPF to variable BOPO*

suggest that financing risk is quite sensitive toward operational risk.

due to liquidity risk, but not in the long run.

**Figure 3.**

*Banking and Finance*

**Figure 4.**

**64**

**Figure 5** shows the response of NPF due to shocks from FDR. Results indicate that NPF responds negatively but only for less than two periods, and then it is stable toward its long-term movements. These findings are in line with VECM estimation where NPF is significantly affected by FDR in the short run, but not significant in the long run. It implies that financing risk exists and sensitive only in the short run

**Figure 6** shows the response of NPF due to shock from BOPO. Results suggest that in the first three periods, NPF responds positively and continues to increase in the long run. These findings are not linear with VECM estimation where NPF is suggested to be negatively influenced by BOPO, either short or long run. Furthermore, the findings

b. FDR which is the proxy of liquidity risk negatively responds originated shocks from both NPF and BOPO. These conditions imply that although the values of NPF and BOPO are high, Islamic banks are able to manage the

c. BOPO which is the proxy of operational risk positively responds positively originated shocks from NPF and FDR. These conditions imply that

operational risk in Islamic banks sensitively occurred and risk management procedure needs to be improved. The positive sign indirectly indicates that financing and liquidity risk would easily trigger the operational risk in Islamic banks, which means Islamic banks should take more serious efforts to settle

This analysis aims to measure the composition or contribution of the influence of each variable to other variables. This study focuses on looking at the influence of variables, including FDR, NPF, and BOPO. The findings of VDC are shown as

**Table 10** shows the contribution of FDR, NPF, and BOPO toward FDR fluctuations. The findings suggest that FDR fluctuations are mainly influenced by FDR itself, even until the 10th period. Numerically, the shares of other variables are less than 10%. However, although the shares originated from NPF and BOPO are not dominant, any fluctuations of FDR are contributed by other variables. In other words, the liquidity risk existed in Islamic banks is insignificantly contributed by other risks, and it then implies Islamic banks frequently face liquidity problems in their balance sheets. In addition, these findings corroborate the previous findings suggested by impulse response that liquidity risk is negatively affected by financing and operational risks, which means it is mainly caused by liquidity itself (banks'

**Table 11** shows the variance decomposition of NPF due to the fluctuations from

NPF itself, FDR, and BOPO. Empirically, the fluctuations of NPF initially are influenced by NPF itself. However, its composition gradually declines as other

**Period SE FDR NPF BOPO** 1.843409 100.0000 0.000000 0.000000 2.433074 93.07333 1.419375 5.507292 3.025591 86.88472 1.272146 11.84314 3.645556 88.13094 0.948149 10.92091 4.108004 89.21504 0.809155 9.975805 4.599803 89.21948 1.820409 8.960113 5.051028 89.96607 2.130988 7.902945 5.459352 90.48151 2.479191 7.039295 5.876766 90.34842 3.281494 6.370083 6.257649 90.52347 3.623686 5.852848 Total average 4.2300232 90.784298 1.7784593 7.4372431

liquidity risk, shown by negative responses of FDR variable.

the operational aspects.

*Risk Analyses on Islamic Banks in Indonesia DOI: http://dx.doi.org/10.5772/intechopen.92245*

*4.1.7 Variance decomposition*

balance sheet mismatch).

*Sources: Author's calculation.*

*Variance decomposition of FDR.*

**Table 10.**

**67**

follows.

**Figure 7.**

*Impulse response BOPO to FDR. Source: Author's calculation.*

**Figure 8.**

*Impulse response BOPO to NPF. Source: Author's calculation.*

a. NPF which is the proxy of financing risk negatively responds shocks from FDR, but positively from BOPO. The former indicates that Islamic banks have conducted sound risk management practices, especially concerning with financing risk in the mid of higher financial intermediaries, while the latter indicates that Islamic banks have high sensitivity of financing risk due to failure in managing operational risk, such us human error, information system, and standard operational procedure.


#### **Table 9.**

*Summary of impulse response results.*

